Can you really live better longer without long-term care insurance?

Is long-term care insurance a smart financial investment for middle-class Americans who can’t afford to self-finance the care they might need? Photo by John Moore/Getty Images

Editor’s Note: Lew Mandell’s doubts about investing in long-term care insurance, published on Making Sen$e earlier this year, left readers itching to know more. For those middle class Americans who can’t afford to self-finance their elder care, for example, couldn’t long-term care insurance be a sound investment?

The author of “What To Do When I Get Stupid,” and frequent Making Sen$e contributor on guaranteeing a financially secure retirement, Mandell responds to readers’ concerns about living without long-term care insurance.

Howard J. Seigel — Portland, Ore.: In a recent column you stated that investing in a long-term health care policy is not worth the potential benefits one might receive down the road. For the poor or those without financial means, Medicaid can provide long-term care. For the wealthy, one can self-pay should the need arise. But for the bulk of the middle class who are likely to lose a substantial portion, if not all of their lifetime savings, why wouldn’t investing in a sound long-term care policy make financial sense? Won’t this investment also protect the “healthy” partner or spouse from becoming destitute? And wouldn’t a policy provide a financial cushion should one need either home health care or to meet the exorbitant expense of an assisted living facility?

Lew Mandell: Long-term health care insurance can be a very smart investment for some consumers, provided that they choose a policy that best meets their needs. Your first question asks why investing in a sound long-term policy would not make financial sense for those in the middle class. In fact, it is precisely those in the middle class who could benefit the most from a long-term health care policy since they can neither self-finance extended nursing home care nor qualify for government assistance through Medicaid.

However, a “standard” policy, which pays a maximum of $150 per day after a 90-day waiting period and pays for three years of care at most, does not provide sufficient protection for those in the middle class with assets and/or partners to protect.

Fortunately, policies are available that pay closer to the $300 per day required of many nursing homes and also pay out indefinitely, in the event of dementia or other long lasting, debilitating maladies that can deplete assets. Lengthening the elimination period from 90 to 180 or even 360 days can pay much of the added cost of these policies. Many middle-income people can self-insure for that period of time but could not cover the cost of care for many years. It may also be a good idea to look into policies that adjust coverage with inflation.

In a follow-up question, you ask whether long-term health care can protect a healthy partner or spouse from becoming destitute. Medicaid will pay the long-term care expenses, and the healthy partner, called the “community spouse,” can still keep all of the income in his or her name from pensions and Social Security. They can also keep from $23,265 to $35,172 in income from their spouse, dependent on housing costs. (In some states, if the income of the community spouse is high enough, he or she must contribute to the cost of the afflicted spouse’s care.)

In addition to retaining some income, the community spouse can hold on to the home, one car and marital financial assets ranging from $23,448 to $117,240, depending on the state of residence. In many circumstances, the combination of retained income and assets will be sufficient to prevent the healthy partner or spouse from becoming destitute.

It is in the interest of states to encourage their citizens to have long-term care insurance to help reduce the state’s Medicaid costs, and many states have programs to incentivize obtaining it. Called the Qualified State Long Term Care Partnership Program, this plan enables the afflicted person to keep, in his or her name, more than the $2,000 in financial assets allowed to those who go onto Medicaid.

In most participating states, long-term care policy-holders who participate in this program can keep a dollar in assets for every dollar that they have in long-term care coverage and still qualify for Medicaid. For example, if an afflicted person has a three-year policy that pays $150 a day, it would provide a total of $164,250 in benefits so they would be able to keep $166,250 in their name ($164,250 plus the basic $2,000), and still have their long-term care paid by Medicaid. This is definitely worth checking out!

Your final question is whether a policy could provide a financial cushion if home health care or nursing home care were needed. The answer is that it could, but we must know how much of a cushion and at what price. It is clearly not a short-term cushion since most policies have elimination periods of at least 90 days. If care were needed for exactly three years and three months, the cushion would have been of perfect size and probably worth the cost. If the needed care is much shorter or much longer, the standard policy may not do a cost-effective job. Here again, it is worthwhile doing the research to make a wise choice.

Laurie Noyes — Farmington, Conn.: I just turned 61 and am paying $4,044 a year for long-term care insurance from Northwestern Mutual; it does cover at-home care. I’m single and have no heirs or dependents. My mother spent eight years in an Alzheimer’s unit at about $90,000 per year, but she also wanted to leave an inheritance to me and my siblings. I don’t have to do that, so would I be better off saving that $4,000 a year? I only make $44,000 a year now, so I’m living paycheck to paycheck, and when I have to switch to Obamacare, I won’t be able to save a penny. Thanks!

Lew Mandell: You’re paying nearly 10 percent of your $44,000 annual income on long-term care insurance and living paycheck-to-paycheck, which implies that you have few financial assets.

Consumers with limited income and few assets to protect should look hard at the costs and benefits of long-term care insurance. Since Medicaid will pick up the costs of long-term care, if needed, it would be hard, from a personal finance standpoint, to justify paying a sizeable portion of one’s scarce income to purchase insurance.

Some readers may question the morality of acting within the law to take advantage of government benefits rather than help pay for them through private insurance. However, as someone who encourages consumers to make financially literate decisions in their own best interests, I find little difference between a low or moderate-income person accepting Medicaid to pay for long-term health care and a higher-income person legally reducing taxes through shelters or other means.

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